Commodity-Currency Pack Is Breaking Up

When risk appetite was strong, so were commodity currencies — and vice versa. The leader of the pack was typically the Australian dollar, what with the country's triple-A rating and high yields, but investors could pretty much count on the Canadian and New Zealand dollars heading in the same direction.

No more.

"As China curbs its massive capital spending plans, Australia finds itself with a bloated currency, challenging terms of trade and and markedly slowing growth," said Boris Schlossberg, managing director of BK Asset Management. With Chinese demand for Australian metals and other commodities, a key prop for the currency has been pulled away — and the Australian dollar has been sagging.

The Canadian dollar has also been a laggard, Schlossberg wrote in a note to clients, "despite the relatively strong growth in the US and oil at nearly $100/bbl the Canadian economy has not been able to benefit."

In contrast, while comments from New Zealand's central bank governor are weighing on the kiwi today, in general it continues to benefit from demand for its soft commodities, according to Schlossberg. "The kiwi has been remarkably resilient as the demand for soft commodities like dairy and wheat remains buoyant translating into much better than expected economic performance."

Schlossberg's bottom line: "for now its clear that the days of risk on risk off trade are over and the each commodity currency will trade on its own dynamics in 2013."